Economy at an Inflection Point

To watch the news, you'd think the economy is running on all cylinders. Dow at an all-time high, unemployment rate is down, tax revenues are up, housing has been recovering, etc.

But when you put these figures in the overall context, the picture changes substantially. The Fed is still pumping in $85 B per month into the economy. The government is still running a $1 T deficit each year. Official unemployment is still quite high at 7.7% and it is only that low due to the fact that tens of millions have left the labor force.

So there is conflicting information. Why do I think we are at an inflection point? Just look at mortgage interest rates.

Interest rates have bottomed out for both 15-year and 30-year mortgages. They are only this low due to the Fed buying so many of the mortgages through their QE3. Even if they expanded this program, it is hard to imagine the rate going much lower even if the Fed wanted to launch a new QE. And with the economic data, it would be hard to argue for a new QE; in fact, the current winds seem to be shifting towards less QE.

So what does this mean? Falling interest rates have allowed the housing market to recover and have forced many would-be bond investor to look for alternatives - many of whom have shifted their money towards stocks. However, as interest rates stabalize, house prices will stabalize and the market will peak. Then you add the sequester and various other threats to the economy (N Korea, Iran, Middle East, state and local debt, Greece, etc.) and whenever one of these risks turn the wrong way, the market will almost certainly spook and there will be a huge drop. And at some point, the deficit spending and QE-forever will stop - we will then be right back where we were in late 2008, but with $6 trillion more debt piled on along with more destroyed lives...

My bet is that you'll start seeing this happen pretty soon. We have had a string of good economic news reports and the market is already on edge due to its all-time high. I'd rather be in cash or gold at this point (although gold has a tendency to go down in market sell-off as people cover their losses).